Dispatches from a Small Business

Yet More Economic Ignorance

Don Boudreax shares this leftish view of the auto bailout from Pat Garofalo:

More importantly though - as Pelosi and Reid said - “federal aid should
come with ’strong conditions,’ such as requirements that car makers
build more fuel-efficient vehicles.” Bill Scher at OurFuture writes,
“With the auto industry in dire straits, we taxpayers have maximum
leverage to demand the cars necessary to help lower energy costs, cut carbon emissions and reduce our dependency on foreign oil.”

So, uh, only when the government gets involved do consumers have any leverage with producers in terms of what products they produce? Hello? I'm sure Circuit City execs will be relieved to hear this.

In free markets, consumers have all the leverage in determining perhaps not what gets produced, but at least what gets sold in any marketplace. Producers who are unable to match what they produce to what consumers buy eventually go bankrupt. In fact, it is this process of consumers exercising their leverage with GM that Congress is attempting to interrupt with a bailout. Consumers are telling GM loud and clear that GM is not making the cars at the price points they want. Unable to do so, GM will likely fail. This failure will result either in 1) GM, under bankruptcy protection, shedding any number of constraints that are preventing it from making what the consumers want or 2) GM liquidating its production assets to other owner/management groups who can do a better job with them.

This quote is a great example of the technocratic bent many leading Democrats bring to economics. What these guys are asking for is not leverage for consumers, but leverage for a few Democratic technocrats to makeover the auto industry the way they want it. People like Nancy Pelosi who would never in a million years be given the keys to a manufacturing corporation by a sane ownership group can effectively grab that jobs via the leverage herseat in Congress gives her.

Postscript: Garofalo adds:

Podesta added that “the auto industry directly employs about 250,000 people
and if you think about the ripple effects, they are the backbone of our
manufacturing economy.” Indeed, according to estimates, one in 12 U.S. jobs is tied to car manufacturing, and a bailout of the industry could help boost the U.S.’s ailing manufacturing sector.

A couple of points. First, a GM bankruptcy is hugely, enormously unlikely to mean the whole company is just shut down. If you have flown in the last 10 years, unless you have favored only Southwest Airlines, you probably have traveled on a carrier in chapter 11. That's what chapter 11 is - a breathing space while the company continues to operate but is able to restructure its liabilities. Personally, I would love to see the company go chapter 7 and have a new wave of innovative people take over the assets and see what they could do with them. But it is not going to happen. GM may shed jobs over the next year, but they are going to do so anyway in the teeth of a recession, not because they went bankrupt.

Podesta must know that the issue in a bankruptcy will not be jobs, but labor contracts (airlines have practically patented the chapter 11 vehicle for renegotiating union contracts). Most GM manufacturing employees would probably keep their jobs through a bankruptcy, but they may well lose their contract that says they get paid $75.86 an hour with 34.5 days a year of paid leave. Garofalo and Podesta are shilling for the union over wage bargaining, not jobs.

The other observation I want to make is to ask why the loss of these 250,000 jobs is going to be so much worse than the loss of 500,000 jobs over the last several years.

I know parts of Michigan suffered, but Podesta is claiming knock-on effects for the whole country. So where were they?

Comments

I have a huge problem with bailing out any of there businesses, be they banks or auto makers. Bailing them out removes the responibilty for any mistakes that have been made. The best way to learn not to touch the hot stove is to get burned. If these companies don't get burned, there will be no reason to find a different way to do things.

Put it another way, we need the dead growth cleard out so the new growth can flourish.

Posted by: wolfman | Nov 11, 2008 11:34:14 AM

Democrats, the most reality challenged species there is.

It's as if you have to remove your brain to vote Democrat. They seem to have never heard of markets.

Posted by: bill-tb | Nov 11, 2008 11:40:59 AM

Someone help me understand these numbers. If the auto industry directly employs 250,000 people are they including the 10 Toyota plants in the US? Or the NC BMW plant? Or the Subaru Plant in Indiana? or any of the other car companies that are doing just fine? If so, who the f*ck cares?

Posted by: Esox Lucius | Nov 11, 2008 2:10:59 PM

"34.5 days a year of paid leave": it's hard not to admire the ".5".

Posted by: dearieme | Nov 11, 2008 3:49:37 PM

I think you misread the Cafe Hayek entry. Don Boudreaux most emphatically does not agree with that leftish view espoused by Garofalo. Am I missing something? If not, you owe him an apology.

You quoted Boudreaux quoting someone else,,, he appears against the bailout.

Posted by: charles waugh | Nov 12, 2008 12:04:43 AM

I'm amazed that anyone could suggest with a straight face that assembly line workers should earn $76.00/hour. As a professional, skilled tradesman of almost twenty years I command a decent salary, but nothing even close to the salary of UAW members. I thought you had to go into business for yourself to get that kind of jack.

Posted by: seanooski | Nov 12, 2008 4:27:42 AM

We've done it before - Take a look at UK motor manufacturing during the last 40 years, Morris Motors morphed into Austin/Morris morphed into BMC, morphed into British Leyland, went bust, morphed into bits sold to Ford, BMW etc etc etc a disaster because they made awful vehicles at an awful price which nobody wanted. The most recent sale was to China (MG Rover) and they are now under license to make a car already 10 years old that no one will buy (except in China of course). When the state and the unions carve up an industry you will all end up with a Trabant.

Posted by: Cold Englishman | Nov 12, 2008 7:58:06 AM

If you really look at the facts and not just superficial stupidity, you see that GM makes autos people want. what has choked them is unions. without their benefits, and unions, gm would make money. unions are the reason why automakers are failing. unions are also the reason why airlines have been bankrupt. get you facts straight and think. its not that hard

Posted by: geez | Nov 12, 2008 4:15:49 PM

Having an auto czar dictating which cars GM will produce brings back memories of the California CARB fiasco madating 2% and then 10% of sales be zero emission vehicles. GM spent a billion dollars developing the EV-1. GM was the only manufacturer to develop and produce a purpose built ZEV, all others adapted existing models. All tooling was was designed for volume production.

Slightly over a thousand were built and leased. The direct production costs were reputed to be over $100,000 per copy, but were leased for $400/month, more for a 220v external charger. Each car produced carried a million dollars of development costs. That's heavy change.

But here's the problem. While government can mandate production levels, they can't mandate sales. There is no way 10% of the California public would buy a vehicle that had a 100 mile range (50 mile radius) and would require a tow if you ran out of fuel. And would take 8 hours to fill up the tank.

And anyway, GM couldn't sell the cars anyway. Under Calfornia franchise laws (as in most other states as well), only authorized dealers can do that. That mean't GM (or any other manufacturer) would require their dealers take 10% of their monthly planning as unsalable ZEVs. It would be up to the dealers to get rid of them and take the loss.

Now anyone familiar with the auto industry knows that dealers aren't shrinking violets. It would have been hilarious to see how the dealers would have reacted. Fortunately a federal court settled the issue in the auto companies' favor.

But that's what will happen when if an auto Czar can mandate production of unsalable cars.

Granted there are major problems caused by the legacy of UAW domination of the domestic auto industry, but there are many many others. Here is what should be addressed by Congress before spending 25 or 50 billion in loans.

Taxation
Both European and Japanese have tax systems that favor exports and hinder imports. Europe has a Value Added Tax of 16 to 19%. Japan has a similar one. In both areas, products that are exported have the VAT forgiven. An American will pay far less than his European counterpart for a Mercedes or a BMW. Ditto for the Japanese. On the other hand, exports from the USA are charged the VAT on top of all US tax content. In essence it is a tariff in our exports and a subsidy on their exports that doesn't violate GATT. It is one of the main reasons we are non-competitive in the world markets.

In addition, foreign cars come to the US through their US arms. Costs of autos and parts for their US assembly plants are structured to minimize US profits/corporate profit taxes. Most assembly plants have received property tax mitigation as they played states against each other.

Medical Costs
Most non-US countries have socialized medicine which is paid for with broad based taxes, VAT in Europe, GST in Canada etc. US manufacturers pay the medical insurance for existing and retired employees which must be added the cost of the cars. 15 years ago there was $1,800 of medical cost content per vehicle at GM. Probably it is higher now.

If the US is to be competitive in the international manufacturing market, we must address these issues. It involves far more than autos.

This post is very interesting and the comments have provided more than enough facts for anyone to realize that this bailout is not a good idea. The part that really hits hard for me is that the UAW has not come out and said that they need to change. They have only said that they will make changes once the plan is passed. This is completely illogical and totally shows that the union is only interested in paying their employees. I was reading a report, I believe on www.emptypig.com that the average hourly wage at GM is 55/hour and if you include the legacy payments, 75/hour. That is incredible. Concessions need to come from all sides. Regardless, I still don't favor a bailout.